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Hermes comments on the Bayer AGM

In September 2016, Bayer, the German life science company, and Monsanto, a well-known US agricultural corporation, agreed to the largest acquisition undertaken by a German company to date. Ahead of the company’s AGM, Dr Hans-Christoph Hirt, Head of Hermes EOS, reflects on what could become the most transformative acquisition in Bayer’s 154-year history:

While we have chosen to support management on all proposed items at today’s AGM, we have to highlight our wide-ranging sustainability related concerns about the pending acquisition. Mergers can often have a negative impact on the overall value of a company, with the process complicated further should they have different corporate cultures, like that of Bayer and Monsanto.

A sustainable future

Bayer’s ambition to become a ‘global leader in agriculture’[1] comes with great responsibility. The combined entity would control a significant share of both the agrochemicals market and the global seeds market. This is against the backdrop of rapid and extensive consolidation across the agribusiness industry.

The acquisition of Monsanto is likely to increase Bayer’s product-related and reputational risks; perhaps most notably through their increased exposure to Monsanto’s Genetically Modified seeds. Other sustainability concerns include the implications for food security, the livelihood of smallholder farmers and biodiversity.

Therefore, investors will need to hold the company to its ‘deep commitment to innovation and sustainable agriculture practices’[2]. Furthermore, with increased product risk and lobbying power, Bayer will need to increase its level of transparency. It is our view that enhanced disclosure of lobbying activities, inclusive of how the company engages with regulators and what issues it engages on would be well received.

Votes on major transactions in Germany

Against the backdrop of the empirical evidence, the transformative nature of the pending acquisition raises once again the question whether, and in what circumstances, shareholders should have the right to vote on major transactions in Germany.

Under German corporate law, the responsibility for approving such transactions generally rests with the supervisory board. While transactions can be presented to shareholders for approval voluntarily, companies are reluctant to do so due to the risks of legal challenges to resolutions passed at shareholder meetings. A vote on the Monsanto deal under the current legal framework could create significant uncertainty and risks.

Therefore, it is critical for investors to ensure an optimal composition of the supervisory board. Moreover, investors in the German market need to pay closer heed to capital authorisations. Bayer was able to take the deal forward because of investor support in the past. In light of this, we have tightened our German Corporate Governance Principles. We are not supportive of capital issuance authorisations, which allow management to issue more than 20% of the outstanding share capital with pre-emption rights, unless the company provides a compelling rationale.

Our experience in other markets, most notably the UK, suggests that there is value in requiring companies to seek approval from shareholders for major transactions. This requirement forces management to make the case for a major transaction to investors and other stakeholders and as such introduces a useful discipline not least with regard to any premium paid for an acquisition. We would therefore welcome a review of the relevant German laws and regulation in this regard.

Hans-Christoph HirtDr Hans-Christoph Hirt is an executive director and board member at Hermes EOS and as Head of the organisation responsible for the sustainable success of the business. He leads and oversees the global engagement programme and the quality of the services Hermes EOS provides to its clients around the world. Hans also leads some high-profile stewardship activities, including priority engagements with major companies in Asia and Germany, as well as interactions with key regulators and organisations. Prior to joining Hermes EOS, Hans worked with international law firm Ashurst. He is the author of numerous publications on corporate governance and law, responsible investment and stewardship. Currently, he is a member of the Steering Committee of the UN PRI Investor Engagement Clearinghouse and the Shareholder Responsibilities Committee of the International Corporate Governance Network. In 2015, he joined the Institutional Investor Council in Malaysia. Hans is a UK-qualified lawyer, holds degrees in Business Administration from universities in Germany and the UK, the ACCA qualification and a PhD from the London School of Economics (LSE). He continues to be involved in academia as a Corporate Governance Fellow at the LSE’s Financial Markets Group and a Teaching Fellow at University College London. Hans speaks French, German and Mandarin. Read all articles by Hans-Christoph Hirt